August 30th, 2017
In pursuance of the discussions in the Sub Committee of the Financial Stability and Development Council (FSDC-SC) held on 26 April 2016, a committee was set up to look at various facets of household finance in India.
The Committee was chaired by Dr Tarun Ramadorai, Professor of Financial Economics, Imperial College London and had representation from all the financial sector regulators, namely, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA).
The report highlighted the unique features of Indian households’ financial decision-making.The Committee has set out several recommendations on enabling better participation by Indian families in formal financial markets, including a Regulatory Sandbox for assessing the role of new financial technologies and products.
The report points out
- Only 5% of the average Indian household’s wealth is in financial assets. The other 95% is in physical assets—77% in real estate, 7% in durables such as vehicles, livestock and equipment and 11% in gold. This is in contrast to the patterns that developed economies – the proportion of financial assets there are much higher.
- The average value of the primary asset in the bottom quintile group (the bottom fifth) of Indian households is equal to Rs22,000 – this shows that the presence of abject poverty.
- However, the report claims that even the rich do not invest much in financial assets whereas it might be easier for them to place illicit earnings or engage in tax evasion by investing in real estate, thereby avoiding the scrutiny associated with investments in the formal financial sector.
- Lack of trust in financial institutions is a big reason that Indian households are investing in gold. Also, unlike in developed countries, people have a large chunk of financial savings to fall back upon after retirement.
- The report points out Indian households are exceptional, as India is the only country in which mortgages account for an increasing share of total liabilities as people approach retirement age, leaving them exposed to repayment risk even in old age.
- 56% of household debt is unsecured, reflecting high reliance on non-institutional sources such as moneylenders. Moreover, the primary reasons for households getting into debt are the loss of crops and livestock, medical emergencies, and the effects of natural disasters. Half the households depend on help from family, friends and moneylenders to overcome these emergencies.
- For medical expenses, 69% of households draw upon informal sources of funding, 26% of which are loans from moneylenders. This points to the precarious financial situation of the majority of Indian households.
The committee says that allocating a larger proportion of savings to financial instruments will raise returns for households and recommends some excellent measures for improving financial inclusion. However, it opines that Indian households are not doing that due to lack of affordability and not awareness.
With modern technology, the costs of financial inclusion have fallen dramatically, enabling a reaching out to the poor. However, the fact that inadequate job opportunities and subsequently income are a major deterrent for Indian households to allocate their savings to financial assets.
The Logical Indian community, while keeping in mind the report of the RBI, urges the government to take necessary steps for providing jobs and social security to its citizens.